Yesterday at a virtual conference hosted by the U.S.-India Business Council, U.S. Secretary of State Mike Pompeo said India may be poised to lure American supply chains away from China because it “has earned the trust of many nations, including the United States.” Mr. Secretary, please call your colleagues at the Office of the U.S. Trade Representative.
New tariffs ranging from 7.5% to 25% on hundreds of billions of dollars in imports from China will encourage companies to look for alternative sources. India is an obvious potential target:
- India is in the region
- India has the second-highest population in the world
- India’s GDP per capita, while growing, is about 80% lower than China
- India has twice as many English speakers than the United Kingdom
- India is a democracy
Yet shortly after the United States raised “List 3” tariffs on imports from China from 10% to 25% in May 2019, it revoked GSP eligibility for India – raising tariffs on many of the same products targeted when imported from China. From June 2019 to May 2020, American companies paid up to $300 million in extra tariffs on imports from India due to GSP revocation. Over 90% were on products subject to Section 301 tariffs when imported from China – those where supply chains are most likely to shift.
About three-quarters of tariffs paid due to lost GSP for India were for products on China Lists 1-3, meaning they can face 25% punitive tariffs when imported from China. This could be a big motivation to shift production to India. Lost GSP shrinks reduces that tariff differences between similar Indian and Chinese products. In many cases, exclusions for Chinese products shrinks it further – sometimes the difference between tariffs on India and China are just a few percentage points.
Shifts for products on China List 4A are even more unlikely without restored GSP. The average MFN tariff imposed on India due to lost GSP for these products is 4.7%, while punitive Section 301 tariffs are 7.5%. China is *more* competitive today vis-a-vis India than it was in early 2019 for products whose MFN tariffs for India are higher than the 7.5% Section 301 tariff, such as artificial flowers, ball point pens, headbands, various jewelry products, and others.
And then there are products where India faces higher tariffs due to lost GSP but there were no increases for China. Agricultural chemicals is an area where India’s competitiveness compared to China has really worsened. Lost GSP added over $12 million in new tariffs, while imports from China face none (allegedly to avoid raising costs for farmers, which is clearly what GSP termination has done). Certain household items (e.g., steel bowls, cooking pans, plastic kitchenware) are another group of products facing higher tariffs on India but no new tariffs on China.
Good cop, bad cop – or just bad cops?
Last week, we wrote about how handbags show the links between GSP expiration, French digital service taxes, China, and “negotiating leverage.” Among the key points: GSP benefits can strengthen other Administration priorities (e.g., French and Chinese 301s) by increasing the gap between tariffs paid by target companies and their GSP-eligible competitors, while terminated (or expired) GSP undermines those other efforts.
The argument isn’t new: we wrote in May 2019 about how canceling GSP for India would benefit China. At the time, the data showed big increases in GSP imports from India – and declines from China – for products subject to Section 301 tariffs. We noted that the May 2019 increase in List 301 tariffs on China from 10% to 25% would be more than offset by GSP loss for India for products like luggage – where rates went from 0% to 20%.
For an Administration that seeks to use punitive tariffs as leverage (bad cop), there’s an opportunity to use GSP as “the good cop.” It’s a movie cliche because it’s seen as more effective than “all bad cops.” If the Trump administration believes India “has earned the trust” of the United States and wants to promote it as an alternative to China, it can start by restoring GSP for India and supporting a long-term reauthorization. Otherwise, companies are stuck in a (tariff) horror movie with nothing but bad cops.